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Weekday Trader

Investors Getting The Travel Bug Again

By

Vito J. Racanelli

Updated March 1, 1999 11:59 p.m. ET

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A mericans have always had a yen for the open road, but that hasn't always registered on Wall Street.

For much of 1998, as U.S. economic growth remained surprisingly strong, investors were cheering on travel and leisure stocks -- among the few cyclical stocks that still had pricing power. Airline, lodging, cruise line and car rental stocks all did well in the first half of the year: Airlines in particular were among the leaders as the Dow Jones Transportation Average set new records.

But as worries over Asia and Russia took hold, these sectors began to slip amid fears of recession and a general selloff in cyclical stocks. The Dow Jones airline industry group, for example, finished 74th in 1998 out of 95 surveyed, after being in the top ten at midyear. The Dow Jones lodging group was 86th, with those shares off 24% last year.

Some of these stocks -- particularly lodging -- have bounced back nicely, as Weekday Trader suggested last October 20 ( "Bulls Check Back Into Battered Hotel Stocks "). Yet many travel and leisure stocks remain around 20 percent off their 52-week highs despite a nice rebound from their October lows.

Yet, as the rest of the market swoons amid fear of higher interest rates, investors seem to have forgotten that travel stocks actually benefit from a robust economy. And, of course, GDP growth clocked in at very robust 6.1% clip in the fourth quarter. Consumer confidence remains strong, unemployment is at record lows and personal income is rising -- all of which spur people to hit the road.

That seems to be happening. The Travel Industry Association forecasts that total travel expenditures in the U.S. will be up a healthy 6% in 1999 and another 5.5% in 2000. That's down a bit from the 7.1% spike in 1998, but it's in line with the healthy growth seen in the last three years. Add to that gasoline and jet fuel prices selling at their lowest prices in years, and it's easy to see why some smart investors have begun parsing through the travel and leisure stocks for bargains.

The group, which has traded as high as 80% of the market multiple in the past, is now trading at about 11x consensus earnings estimates for 1999, or about 40% of the S&P 500's multiple of 26x this year's consensus earnings. Though he admits domestic seat capacity will grow too much at 5% this year, he's betting that traffic among business travelers -- where airlines have the highest margins--will come back from their depressed fourth-quarter levels. "Just a little uptick there" will help airlines beat earnings estimates, he asserts.

Holt has been buying
AMR Corp.
recently. The company, thought by many to be the best managed in the group, is now selling at a 10% discount to the group, a far cry from the 10% premium to the sector it usually garners, he notes. AMR closed Monday at 56 1/8, off about 37% from its 52-week high. AMR, whose shares have suffered in recent weeks thanks to the recent labor action by its unionized pilots, trades at about 9.4x consensus earnings expectations of $5.88 per share this year. Holt sees better than 20% upside to AMR shares. His target price: $75.

More air travel also means more car rentals, of course. Bear Stearns analyst Harvey Katz says the enduring vigor of the U.S. economy "strengthens his confidence" that car rental firms like
Avis Rent A Car
and
Hertz
will see significant growth in demand.

Katz is looking for rental rates to rise by about 3% in 1999. That's below the high-single- digit rate of 1997 but even with 1998's pace. Indeed, the announcement last Friday by Hertz that it is raising all noncontract car rental prices in the U.S. by $3 a day will be a shot in the arm for the group, because the rest of the group should follow, he says.

Katz rates Avis a Buy and Hertz Attractive, because higher rates have a more leveraged impact on the smaller Avis. At Monday's close of 24, Avis shares, which are down about 28% from a 52-week high of 37 1/2, change hands at about 11x First Call consensus 1999 earnings estimates of $2.13 per share -- a discount to the projected 20% earnings growth this year.

For hotels, stronger economic growth should translate into higher room rates and better occupancy. Smith Travel Research vice president Chuck Ross expects average room rates in U.S. hotels to rise 4% in 2000, up from an expected 3.8% rise this year. Industry profits should increase 10% to $22 billion this year, he adds.

Invesco Leisure Fund analyst Mark Greenberg, who began buying some casino and lodging stocks last fall, says his top hotel pick is
Marriott International
.

The stock trades at about 22x 1999 consensus earnings estimates and it's only about 10% off its 52-week highs. But Greenberg says, "I still see good value in Marriott" because of his confidence in management's ability to deliver the earnings. Marriott shares sell at a discount to the S&P 500's multiple of 26 times, but Greenberg thinks Marriott will deliver 50% better earnings growth than the market over the next five years or so.

Wall Street's been taking a vacation from travel and leisure stocks. But with the economy continuing to show surprising vigor, investors may find these stocks a welcome destination again.

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